For those who have gaped in wonder over the years at Wachtell, Lipton, Rosen & Katz's astronomical profits, we can now thank Elon Musk for stripping some of the law firm's billing practices bare.
Lawyers for Musk's X Corp, which owns Twitter, in a lawsuit filed in San Francisco Superior Court last week took aim at 275-lawyer Wachtell. The firm last summer sued Musk in Delaware on Twitter's behalf in a bid to compel him to go through with his then-pending offer to buy the social media company for US$44 billion (S$58 billion).
For its work, Wachtell collected $90 million in legal fees from Twitter shortly before the company changed hands in October - and Musk's lawyers are crying foul.
Alleging unjust enrichment, breach of fiduciary duty and violations of California's business and professions code, X Corp wants the court to force Wachtell to disgorge its fee.
A Wachtell spokesperson in a statement called the suit "meritless" and defended the firm's $90 million payment for the roughly 19-week engagement representing the social media company as "entirely appropriate and expressly approved by Twitter's board of directors, which was independently advised."
Twitter responded to a request for comment with an automated poop emoji. Musk and his lawyers William Reid IV and Marc Dworsky from Reid Collins & Tsai did not respond to requests for comment.
X Corp's complaint includes exhibits that reveal the "strictly confidential" billing rates of more than 60 Wachtell timekeepers in 2022 - an info dump that strikes me as perhaps superfluous but nonetheless fascinating.
The exhibits show that of counsel Leo Strine Jr - former chief justice of the Delaware Supreme Court - topped out Wachtell's billing on the case at $2,000 an hour. Litigation partner Jeffrey Winter charged $1,950 an hour, litigation department co-chair William Savitt $1,850, corporate partner Benjamin Roth $1,650, litigation partner Sarah Eddy $1,600 - the list goes on.
As for associates, those who earned a J.D. in 2020 billed $725 an hour last year. Rates went up $100 per hour per class year after that.
While the billing documents show that Wachtell's hourly rates are high, they're not unprecedented. For example, my Reuters colleagues reported that Hogan Lovells appellate partner Neal Katyal in 2022 commanded $2,465 an hour.
But hourly rates are not the key to understanding Wachtell's riches. According to The American Lawyer, the firm in 2022 posted $7.3 million in profits per equity partner, second only to Kirkland & Ellis at $7.5 million.
More telling, Wachtell's revenue per lawyer - arguably the best measure of a firm's financial prowess - remains far ahead of the pack, at $3.5 million in 2022, according to The American Lawyer. Second place Sullivan & Cromwell was a distant $2.1 million and Kirkland came in at $1.9 million.
Much of the complaint hinges on an engagement letter that Twitter signed with Wachtell on June 21, 2022. That letter, Musk's lawyers repeatedly stress, "contained no mention whatsoever of any additional success fees or other fees tied to results procured for Twitter."
Instead, they argue, Wachtell agreed to be paid on an hourly basis - an arrangement they implied was already generous, since Twitter exempted the firm from its usual requirement that outside counsel discount their hourly fees by 15 per cent.
Except you don't get to $3.5 million in revenue per lawyer just by refusing to discount your hourly rates. In Wachtell's case, success fees are also key.
"Wachtell's business model has long been based on results," said William Henderson, a professor at Indiana University Maurer School of Law who studies the legal profession, noting that co-founder Marty Lipton was "the original go-to lawyer" for a CEO or board facing a hostile takeover.
Wachtell lawyers could credibly offer clients a way to keep control of their companies. "What is that worth? A lot," Henderson said via email. "All of Wachtell's work is this type."
The complaint itself, in paragraph 31, acknowledges that Twitter lawyers recognised the firm's compensation could go beyond the bounds of the June 21 engagement letter. In an email to Wachtell, Twitter's then-head of global litigation wrote that "there may be some provisions, such as a potential success fee, that will need to be added / modified" to the agreement.
A source with knowledge of the situation told me that this was the understanding all along. If Wachtell on Twitter's behalf prevailed in getting the $44 billion deal to go through - a prospect the market seemed to doubt, considering Twitter's stock price last summer dipped to the low-30s despite Musk's pending offer of $54.20 per share - the firm would be entitled to a success fee on top of its hourly rate. Such a bonus is well-known in the industry, and "well within the norms" of Wachtell's other engagements, the source said.
Indeed, another exhibit included in the complaint supports this arrangement. Wachtell in a memo to Twitter's then-general counsel offered seven examples (without naming clients) over the prior two years of "fee arrangements comparable to the arrangements contemplated" with Twitter.
The firm "often receives a fee in the range of 60 to 80 per cent of the fees paid to investment advisors," the memo stated. "The total fee amounts in these illustrative matters range from approximately $33mm to $134mm."
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Musk's lawyers in their complaint argue that these examples were "incomplete, misleading, and otherwise inadequate to provide any basis for informed consent by its client Twitter."
Moreover, they said, Wachtell was more sophisticated and knowledgeable than Twitter about M&A-related legal fees (as if the Twitter in-house team consisted of the proverbial widows and orphans) and that the case did not involve "novel or difficult questions of law." As such, they said, Twitter could have hired any number of other reputable law firms that would have billed by the hour.
It's perhaps not surprising that Musk, now that he's the owner of Twitter, objects to how much the company spent right before his takeover on lawyers who were adverse to him.
What's less clear is what he can do about it now.
Bottom line: The Twitter board approved Wachtell's fees - and Twitter shareholders scored a hefty premium.
Wachtell is "extremely proud of our work representing Twitter," the firm spokesperson said, "which generated billions of dollars in shareholder value."
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